Arab NGOs Warn IMF Against Sharp Cuts to Subsidies

WASHINGTON, Feb 28 2014 (IPS) - Civil society activists from five Arab countries are urging the International Monetary Fund (IMF) to ease pressure on their governments to reduce food and fuel subsidies until stronger social-protection schemes and other basic reforms are implemented.

In a new report, the Arab NGO Network for Development (ANND) and the Egyptian Center for Economic and Social Rights (ECESR) argue that social safety nets in Egypt, Jordan, Morocco, Tunisia, and Yemen are inadequate – or, in some cases, too corrupt — to compensate for the loss of critical subsidies on which the poor and even the middle class depend.

"The pressure should be on the global community that is pushing these austerity measures without considering the actual context or impact on low-income people." -- Leila Hilal

Indeed, in the absence of stronger safety nets, even the gradual removal of subsidies for key commodities may contribute to continuing unrest across the region as the three-year-old “Arab Awakening” plays out, according to the 20-page report.

“In the near term, the unwinding of subsidies cannot serve as the panacea for the serious budgetary and fiscal difficulties facing most Arab states,” according to the report, which was released here Thursday by the Middle East Task Force of the New America Foundation (NAF), a non-partisan think tank.

“By continuing to press Arab governments to remove subsidies, the IMF has inadequately responded to the sweeping social and political changes stemming from the 2011 uprisings and subsequent period of unrest,” it said.

The report also called on the IMF to urge national governments to take other measures, notably instituting progressive tax systems and cutting the military budget, in order to increase revenues and cut spending. Governments must also be encouraged to consult more with civil-society organisation (CSOs), labour unions, and local authorities regarding economic-reform programmes, according to the report.

Jo Marie Griesgraber, who directs New Rules for Global Finance Coalition, welcomed the report, saying it was the latest indication of growing interest by grassroots groups both in the Arab world and in other countries in transition, such as Ukraine and Burma, in the IMF and of their understanding that national economic problems need to be addressed at the global level.

At the same time, she noted that the authors may be overstating the leverage the IMF enjoys over national governments with which it is required under its charter to negotiate agreements.

“I’m sure, if given a choice, the IMF would prefer that reducing subsidies would not be the first policy option they would want to implement to reduce deficits,” she told IPS. “It’s a government policy, and the government is going to agree to cut subsidies to the poor before it agrees to cut military expenditures.”

“The IMF can’t do everything; you need the World Bank; you need regional banks; you need an international court to throw corrupt officials in jail; you need a national political commitment for people to pay taxes,” she said. “The IMF is too limited in what it alone can do, although it serves as a convenient scapegoat for governments.”

With the recent uprisings, she told IPS in an interview from Jordan, “people feel that their voices are more valuable, that they have more agency, and that there’s much more at stake in terms of policy, and they want to be heard.

“So the idea is that the pressure should be on the global community that is pushing these austerity measures without considering the actual context or impact on low-income people,” she said.

While the mass demonstrations, violence, and political upheavals across the Arab world continue to capture the headlines, relatively little attention has been paid to the underlying economic problems that many analysts believe lie at the root of the continuing regional turbulence.

The Washington-based IMF, which is dominated by the wealthy Western nations, has long been involved in the Middle East/North Africa (MENA) region, particularly in the five low- and middle-income countries that are the subject of the report.

The lender of last resort for failing economies, it provides short-term loans that are subject to recipient governments’ compliance with conditions designed to reduce, if not eliminate their fiscal deficits.

Over much of its history, it acquired a controversial reputation for pushing severe austerity on governments as part of “structural adjustment” programmes which hit the poor and most vulnerable sectors of society the hardest, often as a result of cuts to food and fuel subsidies, as well as social services, including health and education.

The IMF said it was unable to comment before deadline.

Cuts in subsidies have been particularly controversial because of their immediate impact on the population. In 1977, for example, a cut in bread subsidies in Egypt provoked widespread unrest, as did Jordan’s attempts cut subsidies in 1989 and again in 1996. When the IMF sent a mission to Egypt in April last year, it was greeted with protests by civil-society groups, labour unions, and political parties anticipating that the agency would demand similar cuts as a condition for much-needed loans.

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In much of the region, food and fuel subsidies make up a large percentage of government spending; in 2012, for example, they accounted for 10 percent of the Egyptian budget.

As the report itself notes, the Fund – as well as its development sister agency, the World Bank — has become increasingly sensitive to these criticisms and sought to persuade governments with which it negotiates the loan conditions to mitigate the impact on the poor by reducing subsidies more gradually and, with the Bank’s help, strengthening social-safety nets for the most vulnerable.

But the report, which was based on interviews with more than a dozen prominent civil-society activists from the five countries, as well as analyses of IMF staff reports and other IMF documents, argues that these efforts are sometimes based on faulty assumptions.

“Theoretically, the IMF proposes the expansion of social safety nets as a way to offset the negative impact of subsidy removal on the poor,” it said. “In practice, however, social protection schemes are underdeveloped and often nonexistent in Arab countries, and are thus incapable of cushioning the poor against rising prices. In many instances, corruption and the absence of transparency mechanisms further complicate the task of distribution social welfare benefits.”

“Subsidy reform should only occur upon the establishment of sustainable and comprehensive social protection schemes, and can only proceed with broad support from a variety of stakeholders,” according to the report.

“Our analysis highlights the need for the IMF and the G8 countries to adapt their advice to the changing political and socio-economic conditions in the Arab region,” said NAF’s Abdulla Zaid, one of four the report’s co-authors. “The Fund’s one-size-fits-all advice prioritising fiscal austerity measures over social and economic rights fails to account for the harmful impact subsidy removal would have on low and middle-income individuals, and thus, stability.”